Allstate Saves Millions With Six Sigma

When GE Capital announced to the world that it had saved $400 million in 1999 by applying six sigma principles throughout its organization, Marla Friedman listened.Then, as senior vice president of operations at Allstate Financial, she shared this impressive news with her boss Tom Wilson, the firm's president at the time.

"Tom said, 'Go look at it. I want to use it across the whole company,'" says A.J. Ijaz, director of six sigma enablement at Allstate Financial, the life and financial services arm of Northbrook, Ill.-based Allstate Corp.

As a result, Allstate Financial began six sigma training in the fall of 2000. The company has since launched nearly 80 six sigma projects and completed more than 40 of them. And, although the company won't reveal the actual amount it has saved over the past two years, it has saved millions of dollars using six sigma, according to Ijaz.

In fact, six sigma has been so successful on the financial services side of the business that the property/casualty side began importing the methodology this year. That's not surprising, since Wilson became president of Allstate Protection in October. "P&C is piloting six sigma with three or four projects," says Ijaz.

People within a company are trained as six sigma "black belts" and "green belts"-experts who are armed with statistical techniques, process mapping and analysis tools, and project and change management skills.

Working in teams, they scrutinize products, processes and transactions for errors and inconsistencies. Their goal is to reduce "defects" to a standard deviation of six sigma, which is 3.4 defects per million opportunities for a defect to occur. In other words, 99.99966% error-free.

To increase sigma level, you have to decrease variation, explains Tracy Friend, senior quality manager and six sigma master black belt at Allstate Financial. "For us, it works best for repetitive processes," she says.

For example, Allstate Financial applied the six sigma method to its variable annuity death claims operations. "We knew there were some problems with the death claims, and that's all we knew when we went into it," Friend says.

Using the DMAIC method (see box, above), the project team determined what the problems were, how frequently they occurred, where they occurred, and what was causing them. "We found some death claims were being calculated incorrectly, and some were being paid incorrectly-even though they were calculated correctly," says Friend.

Six sigma often overturns conventional reasoning, and in this case it revealed that Allstate's problems with death claims were not caused by a new and overworked staff making data entry errors-as the area manager had hypothesized. In fact, the team found no data entry errors at all on the 315 death claims it analyzed.

Rather, the two main causes of problems were: employees using the wrong source documentation to process the death claims, and confusion about which death claims needed to be forwarded to the actuarial group for calculation.

To improve the calculation errors, the company implemented programming changes, and to improve the payment errors, it instituted workflow changes. Complex claims are now routed to two highly skilled, senior-level handlers.

Even more surprising than the real causes of the problems is the outcome of the improvements that Allstate Financial made to the process: Variable annuity death claims overpayments fell from six digits to less than $10,000 per year.

Making money

It's cost savings like these that inspire companies to implement six sigma in the first place, but the methodology can be used to generate revenue as well.

Allstate Financial has launched several six sigma revenue-generation projects, including one aimed at increasing the dollars placed in structured settlements that come from the property/casualty side of the business.

"We have Allstate P&C settling claims across the street," Friend says. "Instead of paying cash to the customer or placing the business with a different carrier, they should be looking to (Allstate Financial) first."

Again, using the DMAIC method, the six sigma team examined how much penetration Allstate Financial had in structured settlements coming from Allstate P&C.

It analyzed the cases that settled: Which ones were most likely to be successful at a structured settlement? Was it a certain dollar amount? A certain injury code? A certain geographic area?

Then, the team analyzed why settlements were not placed with Allstate Financial. Were brokers aware of the company? Was it easier to make a cash settlement? Were they aware of what a structured settlement was?

To improve the situation, the company launched face-to-face and online training for agents and brokers-helping them to recognize claims that have structured-settlement potential.

In the next phase of the project, the data management system will be modified to identify those high-potential claims automatically.

Based on the results of the pilot, the company expects to retain twice as many dollars in structured settlements from the P&C side of the business, says Ijaz.

"The reality is: Six sigma is about going after the low-hanging fruit," Ijaz adds.

"Then, as you move forward, you get into more design work or creating greenfield projects that will help you increase revenue rather than just taking costs out of the process."

For more information on six sigma, visit the Web site www.isixsigma.com.